In re Wells, 11799-M.
Decision Date | 10 December 1965 |
Docket Number | No. 11799-M.,11799-M. |
Citation | 248 F. Supp. 224 |
Parties | In the Matter of Ralph Eugene WELLS, Bankrupt. |
Court | U.S. District Court — Northern District of Alabama |
Roy D. McCord, Gadsden, Ala., for the bankrupt.
T. J. Carnes, Albertville, Ala., for the trustee.
This case presents an important question of bankruptcy law because it involves a construction of the Amendment to Section 14, sub. c(3), passed by Congress in 1960, which appears to be a legislative declaration of policy resolving the conflict in the decisions as to the nature of the right to a discharge.
The objections to the bankrupt's discharge were filed by the Trustee, as authorized by the statute, and the Referee overruled the one ground of objection which he allowed to stand, in the following language:
The Referee's conclusion is based on the text from Collier on Bankruptcy, V. 1 P. 1388, viz.:
"
The quoted text from Collier is followed by an analysis of the 1960 Amendment which contains the following statement:
"Where a person gives a statement of his own finances for the purposes of inducing a creditor to lend money to a business in which he is interested, or to which he bears a relationship, whether this operates to bar his discharge should not depend upon the form of the business, viz., corporate, partnership or sole proprietorship."
The wording of the statute was changed by the 1960 Amendment to extend it to cases not only where the bankrupt made false statements as to his individual property, but to cases where the false statements related to a corporation of which he was an executive officer.
Since his personal creditors would presumably have no recourse against corporation assets why should the bankrupt be denied a discharge as to his personal creditors who would ordinarily not have relied on such false statements and therefore have possibly suffered no injury?
This question can be answered by the assumption that Congress by the 1960 Amendment intended to deny an executive a discharge in all cases where he made false financial statements respecting his own or the corporation's financial condition and Congress has laid at rest the doubt, if doubt existed, in prior decisions that:
1. The right to a discharge is purely a privilege.
2. The "reliance theory" is considerably weakened, and reliance is satisfied upon showing that any creditor relied on the false statement whether he is still a creditor or not.
The Referee found: (a) That the bankrupt as a partner and as Secretary-Treasurer of a corporation wilfully made false financial statements in writing respecting the financial condition of the corporation. (b) The creditors of the bankrupt had no actual knowledge of the false statements. (c) That the false statements were relative to the partnership and corporate "businesses" and (d) Were made to aid third parties to obtain permanent real estate loans to in part pay off the mortgages and possible materialman's liens on houses constructed by the partnership and later by the corporation. (e) That the "businesses" benefited indirectly by the false statements in that the bankrupt and the "businesses" were enabled to maintain an increased financial status because of the funds moving to them in the transactions. (f) That the creditors did not rely on the financial statement (of which they had no direct knowledge), but rather on the status or relationship between the lending agency and the businesses which would not have been maintained had the false statements not been made.
The Referee concluded that the causal connection was too remote to find that credit was obtained by making or causing to be made a false statement within the meaning of Section 14, sub. c(3).
It is not too clear whether the creditors of the bankrupt were not in part also creditors of S & W, but it may be assumed there were three sets of creditors involved, viz.: (a) Creditors of the bankrupt, an individual; (b) Creditors of the S & W Company, a partnership; and (c) Creditors of the S & W Company, Inc., a corporation.
The 1960 Amendment in explicit terms denies a discharge to the individual for false statements affecting not only his creditors, but creditors of a "business" of which he was a partner or executive.
Prior to 1960 and after 1926 Section 14, sub. c(3) provided:
"(3) obtained money or property on credit, or obtained an extension or renewal of credit, by making or publishing or causing to be made or published in any manner whatsoever, a materially false statement in writing respecting his financial condition;"
Under the terms of that provision the Courts on several occasions have sustained the denial of the discharge where the credit was obtained for a corporation of which the bankrupt was the sole or the principal stockholder.
Mr. Justice Holmes in the case of Levy v. Industrial Finance Corporation said in 1928:
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...4 S.Rep.No.1688, 86th Cong.2d Sess. (1960) reprinted in 1960 U.S.Code Cong. & Admin.News, Vol. 2 at pp. 2954-2956. 5 See In re Wells, 248 F.Supp. 224 (N.D. Ala.1965). 6 Dunn v. Arutt, 422 F.2d 501 (2 Cir. February 20, ...